Treasury Yields Fall to February Low as Growth Concerns Revive

  • Government bonds rally in U.S. and Europe before Brexit vote
  • U.S. auctions 30-year debt at second-lowest yield on record

U.K. 10-Year Gilt Yield Drops to Record Low

Treasuries rose, pushing the 10-year note yield to the lowest since February’s global growth scare, as renewed concern over lackluster economic expansion and a potential U.K. exit from the European Union boosted demand for the safest government securities.

U.S. yields declined as U.K. gilt yields touched the lowest level on record ahead of the country’s June 23 vote on its EU membership. Oil prices fell as well, prompting a decline in U.S. break-even inflation rates, while the gap between U.S. two- and 10-year yields touched the narrowest since 2007. Adding fuel to the concerns were reports that billionaire investor George Soros has been making bearish investments driven by speculation over growth in China.

The futures market’s implied probability of a June Federal Reserve interest-rate increase has fallen to zero percent from 22 percent a week ago. Fed Chair Janet Yellen on June 6 called gradual rate increases appropriate, after the Labor Department’s May nonfarm payroll report showed the slowest pace of jobs growth in almost six years. That may have taken investors by surprise and forced them to unwind short positions, or bets that U.S. debt prices will fall, said Aaron Kohli, a fixed-income strategist in New York at BMO Capital Markets, one of 23 primary dealers that trade with the central bank.

“It’s a slow, creeping realization that economic data are not keeping up,” said New York-based Kohli by phone. “It’s clear from the price action that a lot of people were short moving into NFP, and expecting a hawkish Yellen speech.”

The 10-year note yield dropped two basis points, or 0.02 percentage point, to 1.69 percent as of 5 p.m. in New York, the lowest since Feb. 11 on a closing basis, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 rose 1/8, or $1.25 per $1,000 face amount, to 99 14/32.

Bond Auction

U.S. 30-year bond yields fell two basis points to 2.49 percent, the lowest closing level since Feb. 10. The Treasury sold $12 billion of 30-year securities at the lowest yield since January 2015 and the second-lowest on record for that maturity, in the last of three note and bond auctions this week.

Demand for U.S. debt has been driven in part by investors seeking yield in a world with more than $10 trillion of debt with negative interest rates. Investors bidding through primary dealers, known as indirect bidders, bought 73.6 percent of the securities at Wednesday’s $20 billion 10-year note auction, the most ever based on Treasury Department data going back to 2003.

“There’s just a tremendous demand for yield across the planet,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. And after last week’s jobs data, safe assets are in demand because “the sentiment has changed dramatically. One number and we’re back in the soup.”

Treasuries are on pace to add to last week’s 0.8 percent return, the biggest gain since the period ended Oct. 2, according to Bloomberg U.S. Treasury Bond Index data.

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